Welcome Affordable Care Act: Are You Prepared for the Cadillac Tax?

WelcomeAffordable Care Act: Are You Prepared for the Cadillac Tax?

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Objectives for Today

Provide Education/Background on the Excise (“Cadillac”) Tax – Why it Exists– Legislative History– How it Will Impact Employer Plans and Employees

Assist Employers with Planning Process to Mitigate Tax Liability– Plan Design Modification– Rating Methodology– Develop a Multi-Year Strategy– Reporting Issues

Answer Questions and Provide as Much Clarification as Possible

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Agenda

• Basics – Description of the Tax– Who is Impacted?– Timeline (2018 and beyond)– FSA, HSA, HRA Considerations– IRS Proposed Regulations/Guidance– Retirees: Pre-Medicare, Medicare & Blended – Reporting Requirements

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Agenda Cont.

• Planning to Mitigate Tax Liability– What Should Employers be Doing Now?– Multi-Year Strategy– Tools and Reporting

• Legislative Outlook

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Just for Fun

• Imagine it is September 2018, not 2015.• The new President and Congress have not modified or

eliminated the Cadillac Tax.• You have responsibility for benefits, compensation and payroll

and you are planning to retire in two years.• You have just discovered that your highest cost PPO plan with

one-third of your employees enrolled has a projected 2018 excise tax liability of $1,000,000.

• You must now inform your Board (or other business officials) of this $1,000,000 surprise cost that must be paid in the first half of 2019……………

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Why does the Cadillac Tax Exist?

• Show me the money!!!!!– The ACA is expensive.

• Helps reduce the apparent cost of the ACA • Helps fund the cost of the ACA

– The Cadillac Tax is expected to raise approximately $90 Billion over first decade.

– Assist with slowing the rate of health care cost increases.– Create more informed and engaged

healthcare consumers.

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Why does the Cadillac Tax Exist?

• Address the perception of unequal tax treatment of employer-sponsored health coverage

– Tax-favored treatment “costs” the government approximately $250 billion annually.

– Perception that highly-compensated employees receive greater tax benefit than non-highly compensated employees.

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The Basics – What is it?

• The “Cadillac” Tax is a 40% non-deductible Excise Tax on calendar year 2018 “high-cost” benefit plans above federal thresholds.

• Only two categories: “self-only” and “other than self-only”

$10,200 for individuals $27,500 for families

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• Thresholds for Pre-65 retirees and high risk employees (police, firefighters, EMTs, etc.) are $11,850 for individuals and $30,950 for families.

• Costs include employer/employee contributions toward premium, including medical, Rx, behavioral health, chiropractic, EAP, on-site clinics, employer and employee contributions to FSA contributions, employer HRA contributions, and employer and pre-tax employee contributions toward an HSA.

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• IRS is considering different approaches to HRA cost Determination.– Possibly count only amounts made newly available each year.– Average of all HRA contributions.

• Only governmental guidance is from the original ACA and two IRS Notices.– Notice 2015-16 issued in February 2015– Notice 2015-52 issued in July 2015

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• Applies to fully insured and self-funded (ASO) employer-sponsored health plans.

• The tax calculation is applied to all health plans on a separate basis. Employers may not average all plans to determine the tax liability.

AVERAGE

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• The tax is actually calculated on a monthly basis (using 1/12 of annual thresholds and premium amounts).

• Costs also include pre-tax premiums for specified diseases (e.g., Cancer), Critical Illness and Hospital Indemnity plans.

• The tax is not applicable to insured stand-alone dental and vision plans. Self-funded dental and vision benefits are likely to be excluded from the calculation pending future guidance.

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• Cost of coverage determined “under rules similar to” rules determining applicable COBRA coverage. More guidance is expected on premium determination approach.

• The tax calculation includes all employees and dependents, COBRA, retirees without Medicare, and Medicare-eligible retirees covered under the health plan.

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Cadillac Tax Sample Calculations• Example 1

Susan Sample – Self Only CoverageAnnual PPO Plan Cost $8,400Tax Threshold $10,200Excise Tax Liability $0

• Example 2 - Same Situation, but: – Susan makes an annual FSA contribution: $2,000– Pre-tax Critical Illness policy $420– Total “Premium”= $8,400 + $2,000 + $420 = $10,820– Excise Tax = ($10,820 - $10,200) = $620 x 40% = $ 248

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Cadillac Tax Sample Calculations

• Example 3

Joe Sample – Employee + Family CoverageAnnual PPO Plan Cost $26,400Tax Threshold $27,500Excise Tax Liability $0

• Example 4 - Same Situation, but:– Joe makes an annual FSA contribution: $2,500– Pre-tax Critical Illness policy $ 420– Total “Premium” = $26,400 + $2,500 + $420 = $29,320– Excise Tax = ($29,320 - $27,500) = $1,820 x 40% = $ 728

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Is there any relief from the Thresholds?

• Thresholds will be adjusted for 2018 if the cost of the federal employee self-funded Blue Cross/Blue Shield plan increases by more than 55% from 2010 to 2018 (which appears unlikely).

• 2019 threshold will increase by CPI-U, plus 1%. Subsequent increases based on just CPI-U.

• Thresholds will be further adjusted in 2018 for Age/Gender demographics compared to national workforce. (No regulations yet). This may be a very positive development for public agencies.

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Who Will be Impacted?

• The Cadillac Tax will have a greater impact on high cost plans, and in particular, collectively bargained plans where salary dollars may have been exchanged for increased benefits or reduced employee benefit contributions.

• There are currently no adjustments for geographic cost differences. Northern California employers will be hit particularly hard.

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Who Will be Impacted?• Kaiser Family Foundation estimates 16% of all employer plans without

FSAs will be impacted in 2018. 26% of plans with FSAs will be liable for some tax. For large employers, the KFF estimates 46% of employers will be impacted.– The impact on California public

agency plans is likely to be much higher.

– Many of our clients with PPO plans or those in high-cost regions have plans that already exceed the thresholds!

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Calculating the Tax

• The tax calculation begins in the 2018 calendar year, regardless of when the employer’s Plan Year begins.

• Tax liability for 2018 will be reported in 2019 (date not yet established).

• The employer is responsible for calculating each coverage provider’s share of any excise tax (if more than one), and the employer must report the tax to the coverage provider(s) and the Department of the Treasury in a manner to be determined in future regulatory guidance.

• If the employer inaccurately calculates the amount of tax, the employer is subject to a penalty equal to 100% of the tax!

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Who is Liable for the Tax?

• Tax is payable by the coverage provider(s).• Employer must allocate the tax if there are multiple coverage providers.• Who is the coverage provider?

– For insured plan: Health Insurer– For HSA: Employer making contributions– All other coverage (self-funded plans, HRAs and health FSAs):

– “Person that administers the plan benefits”– No statutory definition, except that “Person that administers the

plan benefits” includes the plan sponsor, if plan sponsor administers benefits under the plan.

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– IRS Notice 2015-52 raised two possibilities:• Option 1 – The person responsible for performing the day-to-day

functions that constitute the administration of plan benefits, such as receiving/processing claims, answering inquiries, providing technology platform, etc. The IRS anticipates this person would generally be a third-party administrator (TPA).

• Option 2 - The “person” that has the ultimate authority or responsibility under the plan with respect to the administration of plan benefits, including eligibility determination, arrangements with service providers, authority to terminate contracts, etc. The IRS anticipates this person would be identifiable based on the terms of the plan documents and would not necessarily be the person who performs the day-to-day routine administrative functions. (This approach would include the plan sponsor if the plan sponsor administers the benefits under the plan).

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• Ultimately, we expect the employer will be liable for the tax under self-funded arrangements, but the issue is not settled and final regulations may have an impact with regard to public agency JPA vs. employer liability.

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Cadillac Tax Timeline

• February 2015: Notice 2015-16 issued– May 2015 comment period ended

• July 2015: Notice 2015-52– October 1, 2015 comment period ends

• Spring 2016(?): Proposed regulations expected, followed by a comment period

• 2017 - Final(?) Regulations

• January 2018 – Tax begins 2018 2017 2016 2015

2015

2016

2017

2018

March 2010 Original ACA Legislation

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Cadillac Tax Planning & Preparation

Planning to Mitigate Tax Liability

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• STEP 1: Initial 2015/2016 assessment of Cadillac Tax liability/exposure by benefit plan. Identify benefit plans with cost trajectory causing 2018 tax liability.

• STEP 2: Model alternatives (plan design, contribution strategy, benefit portfolio) to mitigate costs 2015 to 2018.

• STEP 3: Annual re-assessment in 2016, 2017 and 2018. Need employee-level tax projections for accurate planning, no later than 2017.

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STEP 1: Perform Initial 2015/2016 Assessment - Benefit plan level tax projections– Use total rate (gross premium/total funding/COBRA) for each benefit plan

option offered. Adjust rates to calendar year.– Trend total rate or rate components (medical, Rx, behavioral health, EAP,

chiropractic), based on how renewal is structured.– Generate initial tax projections by benefit plan.– Identify benefit plans with projected 2018 costs above thresholds.– Calculate or estimate additional tax liability due to FSA contributions or

employer contributions to HSA/HRA accounts. – Also estimate impact of pre-tax Critical Illness, specified diseases or

Hospital Indemnity plans. These will need to be included in final cost estimates on an individual basis to determine actual liability.

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Tax Calculation Example Summary Results

Subscribers Benefit Plan2018 Projected Annual Excise

(Cadillac Tax) @ 40%

2018 Projected Annual Health Plan

Cost (without Excise Tax)

% Increase to 2018 Projected Health Plan Cost due to

Cadillac Tax

410HMO #1 Narrow

Network$0 $6,582,990 0.0%

141 HMO #1 Full Network $32,601 $2,388,228 1.4%

60 PPO Plan $357,407 $1,903,416 18.8%

505 HMO Plan #2 $0 $7,776,147 0.0%

1,116 Total $390,008 $18,650,781 2.1%

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Communicate with Labor Now!– Maintain flexible bargaining agreements.– Trade health benefit reduction for increased salary dollars or

other benefits?

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STEP 2: Reduce Benefit Costs– Consider adjusting benefit portfolio.– Discuss increasing employee cost sharing for current benefit plans

(deductibles, copayments, coinsurance).– Implement or promote Consumer Directed Health Plans (high

deductible options), narrow network models or ACOs.– Rebalance employee contributions (keeping plans “affordable”) to

promote migration to more cost effective plans.– Discuss replacing early and post-65 retiree plan provisions with

more flexible exchange options.– Enhance wellness and population health management programs

and increase incentives.

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Cadillac Tax Planning & PreparationSTEP 2 (continued):• Limit (or eliminate) FSA, HSA and HRA contributions.• Reduce number of plan participants.• Adjust rate tier structure to more closely align with tax thresholds.

– Eliminate composite rate.– Collapse family and other non self-only tiered rates into one tier.– Review early retiree rates within active plan to eliminate subsidy

and reduce tax liability.– Can make rate tier changes and maintain employee contributions.

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STEP 2 (continued)• Consider moving fully insured plans to self-funded model.

– Reduced ACA fees– Lower administrative costs– More rate setting flexibility

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STEP 3: Multi-Year Planning and other Considerations• Develop multi-year strategy. Reassess each year to ease transition.

― Huge changes on 1/1/2018 may create havoc!• Develop Reporting Methodology

– No specific requirements set yet by IRS.– IRS suggested Form 720 may be used (currently for PCORI Fee

Reporting).– Must be able to track all premiums/contributions by individual

employee on a monthly basis.– May require outside vendors to track and report due to complexity.

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STEP 3 (continued)• Additional Cadillac Tax liability will also impact financial

statements (GASB 74 and 75).• Nondiscrimination testing will be required, which may impact

Highly Compensated Individuals (HCI). – No guidance yet from IRS.

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Legislative Outlook

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• Everyone seems to hate this law – won’t it just go away?• House Legislation – H.R. 879 (February 2015) and H.R. 2050 (May 2015)

would repeal the tax.• Bipartisan Senate Bill – S.2045, introduced 9/17/15 by Heller (R-NV) and

Heinrich (D-NM) would repeal the tax.• Only part of ACA not supported by Democratic candidates• Alliance to Fight the Forty

– Private and Public Employers, Unions and Insurers

• How to replace funding?• Presidential veto for legislation?

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Closing Comments

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Immediate Cadillac Tax Considerations

• Is the Cadillac tax on your employer’s radar?• Have you performed an assessment of how your plans might be

affected?• Do your employees know the Cadillac Tax is on the horizon?• Develop multi-year strategy. If 2016 benefits are set, there are

really just two years remaining to make changes.• Begin to develop reporting and accounting methodology.• Watch Congress for changes.• Avoid the nightmare scenario!

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Thank You for Your Participation!

Please visit our website:

www.keenan.com/hcr

Disclaimer – Keenan & Associates is an insurance brokerage and consulting firm. It is not a law firm or an accounting firm. We do not give legal advice or tax advice and neither this presentation nor the documents accompanying this presentation constitutes or should be construed as legal or tax advice. You are advised to follow up with your own legal counsel and/or tax advisor to discuss how this information affects you.

Documents

Welcome Affordable Care Act: Are You Prepared for the Cadillac Tax?